The Machiavelli nature of sugar millers

The sugar industry in Pakistan seems to be thriving by exploiting, some say manipulating, loopholes in the legal system rather than improving its technology and bringing efficiency to the production of the commodity.

Over the years, it has developed a verifiable habit to collectively and individually challenge every bid to regulate, or even monitor, it and do so at every possible lawful forum: creating a legal haze around the issue and maximising profits through that confusing legal and administrative miasma.

So far, the strategy has served the purpose well and encouraged the industry to rely heavily on it for thriving. “It is rather now part of marketing and profit strategy of the industry,” says a dealer, and he points out: “look at the battery of lawyers representing the industry. They are the most expensive ones, and their collective cost runs into billions of rupees. But the industry happily invests in them because they ensure multiplied returns.”

The example of the Competition Commission of Pakistan (CCP) clarifies the industry’s legal strategy. In 2021, the commission moved to investigate charges of cartelisation against the Pakistan Sugar Mills Association (PSMA). It found the industry guilty and imposed a fine of Rs44 billion on it and some of its member mills for cartelisation.

Using legal loopholes, the industry has artificially driven up prices while creating a conducive environment for smuggling

Since then, PSMA and its members have challenged the decision at all possible forums throughout the country. Over the last two years, the Lahore High Court received 25 writ petitions challenging the CCP decision, six more are pending with the Sindh High Court and yet another 24 are in the Supreme Court of Pakistan. These are in addition to 72 applications pending with the Competition Appellate Tribunal (CAT) — totalling 127 legal challenges against one decision.

With the current pace, it may take eternity to clear these applications, and meanwhile, the PSMA is free to not only make additional money but delay the payment of fines as well.

Similarly, the government constituted the Sugar Inquiry Commission in early 2020 and tasked it to conduct a forensic audit of the industry for rising prices. The commission came up with a damning report, accusing the millers of everything under the sun: earning illegal profits amounting to billions of rupees through unjustified price hikes, benami (nameless) transactions, tax evasion, suspicious sugar export deals, illegal power production, misuse of subsidy and purchasing sugarcane off the books.

It met the same fate as high courts were moved, stopping the Federal Investigation Agency from holding investigations and persecuting individual mill owners. The commission report is still hanging the balance.

Encouraged, the sugar industry went to the Lahore High Court this year when the federal government calculated and notified a price of Rs98.50 per kilogram on April 20, 2023. The court suspended the order on May 4, barely two weeks of operation, and the next date of hearing was fixed for September 20, 2023 — with a hiatus of over five months, or more than 60 per cent of the sugar life cycle.

The honourable court maintained that the federal government has no right to fix the price after the 18th Amendment. Taking a cue from the court order, Punjab delegated powers to the cane commissioner and asked him to sit with the millers and calculate a new ex-mill price to be notified by the provincial government.

The PSMA again went to the court, and even the new provincial effort was stalled on August 1, 2023, by the court when it directed the commissioner to continue the process but neither make the conclusion public nor notify it, effectively killing both provincial and federal efforts to fix the price.

The current position is that the stay order against the federal government notification is vacated, but the one against provincial notification continues without changing the ground realities for more than five months.

During these five months since both stay orders have ruled the market roost, the industry sent the price through the roof: from officially fixed Rs98.50 to Rs190 per kilogram at various stages and points of time — or a jump of 90 per cent, and the process continues.

The Punjab now calculates the millers have sold 1.9 million tonnes during these stay orders and minted a windfall of more than a whopping Rs100 billion so far. Meanwhile, the common man wonders, who should be held responsible for this killing price hike contributing to national hyperinflation and making life difficult for those already surviving below the poverty line? The questions still remain unanswered as the industry benefits from snail pace legal process and its fiscal prowess to afford expensive legal assistance.

The industry not only went after the government’s power to calculate and notify prices, but it also got the official wings clipped in other areas as well.

The Punjab government had devised a trace and track system following the Sugar Commission Report, which maintained that there was almost a 30pc difference between sugarcane production and sugarcane crushing figures — denoting off-book purchases and sales by the industry, which dealers and speculators use to manipulate the market and give millers powers to avoid taxes, under-report production and rig market to their advantage.

In order to control these market trends, the Punjab had devised a system to see what millers receive and sell and to whom they sell. The industry challenged the system in the Lahore High Court, which suspended the operation of the system, effectively tying the Punjab government’s hands behind its back.

With the court stay order in their hands, the millers stopped cooperating with provincial authorities and refused to provide digitised sale-purchase data. Over 0.7m tonnes were smuggled out of the country during the stay order because of higher world prices. The industry revelled in double profits: selling at a higher price to smugglers and beating the drum of shortages at home to increase the price at will.

In a nutshell, all five laws — the Price Control Act, the Sugar Factories Control Act (1950), Food Stuff Control Act, Prevention of Speculation in Essential Commodities 20-21 and the Punjab Sugar Supply Chain Management Order — regulating the sugar industry are held in abeyance, clearing the deck for the industry to make as much profit as it can, and contribute to national poverty.

“If the industry can exploit gaps in the legal system and make this kind of profit every year, does it have any incentive to improve upon technology, production efficiency and lower cost of production,” wonders Muhammad Ramzan, a trader from Lahore.

Published in Dawn, The Business and Finance Weekly, October 16th, 2023